Remote auditing: Fraud detection will be easier as COVID-19 makes 2 years of digitisation possible in 2 weeks

June 19, 2020 5:23 PM

In order to ensure that all the Standards on Accounting / Ind-AS are followed during the process of Auditing digitally, the Auditor will need to Program for various aspects such as Inventory Valuation.

auditors, IiAS survey, investor, Satyam Computers, Satyam Computers scandal, Institutional Investor Advisory Services, equity, financial health, IL&FS Financial ServicesAll processes have to be managed remotely and digitally. Digitalisation, of the scale that we have seen recently, that would have otherwise taken two years happened in a matter of two weeks.
  • Shailesh Haribhakti

The lockdown created a unique challenge of completing Annual audits and account adoption meetings without access to physical records or inventory. All processes have to be managed remotely and digitally. Digitalisation, of the scale that we have seen recently, that would have otherwise taken two years happened in a matter of two weeks and companies such as ACC Ltd., Ambuja Cements Ltd., Torrent Pharma Ltd.  Blue Star Ltd. and L&T Finance Holdings declared their yearly results well in time and also disbursed dividends during the lockdown flawlessly. How did this happen? What were the key changes that got institutionalized and what needs to be done to take the process to its logical conclusion? This piece covers the actual experience that creates the best practices in order to move towards a completely digital auditing world.

In order to ensure that all the Standards on Accounting / Ind-AS are followed during the process of Auditing digitally, the Auditor will need to Program for various aspects such as Inventory Valuation, impact on Property Plant and Equipment & Intangibles, valuations and impairment of investments, Working capital Blockages, Onerous Contracts, Assessment of Contingent Liability, to name a few. Further, the Auditor will need to separately disclose in the financial statements aggregate financial losses incurred during the current crisis. In certain industries such as hospitality, aviation, event management etc. the financials of the previous year may not be comparable with the current year. The Going concern assumption will also need to be carefully considered!

The Auditors of various listed entities who have achieved the reporting deadlines have followed some or most of the following guidelines:

  • Prepare and have clients fill up specially designed questionnaires related to SOPs and Policy guidelines for ensuring effective functioning of internal controls. Cut off and roll forward/backward procedures to be deployed for such events would need to be activated.
  • Ensure an effective and continuous dialogue with the Auditee in order that no crucial aspect is missed out.
  • Training of Audit staff in extensive use of secured technology platforms for sharing client data using state of the Art video conferencing programmes and remote system access.
  • Continuous monitoring of targets given to Audit team and effective review process by senior staff to ensure completion of targets within allocated timelines.
  • Precise documentation of all steps followed during the Audit to ensure complete Audit Trail.

Auditors also have to provide their opinion on the Internal Financial Reporting of the entity which involves risk of fraud, errors and misstatement. Identifying the new risks involved in the current scenario shall include assessing the risks such as remote access to server, video conferencing security, data storage rooms etc. Auditors would have reviewed Internal Controls designed and implemented to consider the impact of COVID-19. Alternate procedures over the operating effectiveness of controls during the lockdown period and extensive documentation for the design and effective implementation of the controls are a couple of important aspects to keep in mind.

Lastly, with the current pandemic in place, Auditing is ripe for a Kurzweil DPU. This will express itself in the near future (i.e. Post COVID era) to bring about the following scenario:

  • Aadhar will connect all Bank accounts, credit cards, internet activity, cell phones and
    devices.
  • Every human (C) engaged in society will have an internet profile and every business (B) will have a visible and well understood model. All intense interactions – B to B, C to C, C to B and step interaction such as B to B to C or B to C to B will have a trackability and an inter counter-party footprint. The ecosystem connections will be so strong that the value retained by each of the economic agents can be tracked and modelled. Value, cost, price and surplus will become transparent throughout the system.
  • Auditing will now become embedded in the Eco-system and will have a largely preventive role. Frauds, leakages unfair delays in payments, patterns of collusion will be detected as intelligent filters are put in place! The system will become self-learning and so will be able to detect any unusual arbitrage or rent seeking activity. The simple detection and notification of such activities will automatically provide a natural incentive to reverse or not indulge in scammed upon transactions.
  • The ICAI and Government of India will collaborate strongly to create the interfaces and the expertise to continually monitor the ecosystem. As consensus evolves along what activities to assign to auditors, how they should effectively conduct them, what may be done to attempted wrongdoings will follow. Artificial Intelligence driven, Machine learning empowered growth path will make the ecosystem ‘SAFE’.
  • Very soon, National initiatives will go Global and no social media interventions in public processes will go undetected. We will then be able to enjoy a low-cost, safe, globally-governed ecosystem that will deliver value to the human race.

In conclusion, the pandemic has brought about certain inherent limitations which coupled with the alternate audit procedures. Some current manual processes will become absolutely redundant. Reliance on management representations and external confirmations will be automated and cross verified. Undeterred by the challenges faced, we must ensure that Audit quality rises.

The zoom or teams or WebEx presentations of Auditors to the Audit committee have actually risen in quality. At the ACs the satisfaction that a true and fair view was existent got crystallised by the rich dialogue and the accounts were commended for adoption. The resilience and agility of the profession got tested and the results were satisfactory. To this new world, rich with a digital footprint we all must migrate. Auditing will never be the same again.

  • Shailesh Haribhakti is a Chartered Accountant. Views expressed are the author’s own.

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